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BOB F. WRIGHT v. STATE OIL AND GAS BOARD OF MS

OCTOBER 05, 1988

BOB F. WRIGHT
v.
STATE OIL AND GAS BOARD OF MS, SHELL OIL CO. AND ITS SUBSIDIARY, SHELL WESTERN E & P, INC.



BEFORE ROY NOBLE LEE, C.J., SULLIVAN AND ZUCCARO, JJ.

ZUCCARO, JUSTICE, FOR THE COURT:

STATEMENT OF THE CASE

The appellant, Bob F. Wright, petitioned the Mississippi State Oil and Gas Board on September 25, 1985, requesting that the Board determine what costs of the Shell-Cohn Unit No. 1 well, drilled in the Alcorn Field in Claiborne County, should be chargeable to Wright's non-consenting interest. Aggrieved by the Board's subsequent order (dated November 21, 1985, and filed December 18, 1985), Wright appealed to the Circuit Court of Claiborne County. The circuit court affirmed in part and modified the order of the Oil and Gas Board. From the circuit court's judgment, Wright appeals. The State Oil and Gas Board and Shell Oil Company cross-appeal from the circuit court's modification of the Board's order.

 FACTS

 In the summer of 1979, Shell Oil Company proposed to drill an exploratory gas well to a depth of approximately 21,000 feet on a 640-acre drilling unit in the Alcorn area of Claiborne County, Mississippi. Shell, which held mineral leases on approximately 8,400 acres in the Alcorn area, owned the majority of the leasehold interests in the proposed 640-acre unit. Approximately 19 percent, or 124.019 acres, of the leasehold rights in the proposed unit belonged to appellant, Bob F. Wright. Shell subsequently attempted to "farm in" Wright's interest in the 124.019 acres or, alternatively, to have Wright join in drilling the test well and pay a

 proportionate share of the drilling costs, based on his percentage of ownership in the 640-acre drilling unit. However, Shell was unable to reach an agreement with Wright as to either alternative.

 On September 26, 1979, Shell petitioned the Mississippi State Oil and Gas Board to force pool and integrate all interests in the proposed 640-acre drilling unit. Shell's petition stated that Shell proposed to drill a well "to a depth sufficient to penetrate and test potential gas formations found below the depth of 12,000 feet." (Emphasis added). The depth is significant because the Board's spacing rules for gas wells require 640-acre units where the well is to be drilled to a depth below 12,000 feet, and 320-acre units where the well is to be drilled to a depth at or above 12,000 feet. Mississippi State Oil and Gas Board Statewide Rules and Regulations, Rule 8. On October 17, 1979, the Board rendered an order authorizing the 640-acre drilling unit (designated as the Shell-Cohn Unit No. 1) and force pooling Wright's 19.378 percent interest in the unit.

 A Shell interoffice memorandum dated January 7, 1980, obtained by Wright through the process of discovery, stated that Shell planned to drill on the unit a 21,000-foot "Knowles" well "to evaluate the multiple objectives at Alcorn Prospect." According to the memo, "[t]he principal objectives are multiple Hosston and Cotton Valley channel sands and limestone oolite bars in the Knowles." (A geological diagram from Shell showed the Hosston sands at a depth of 15,600 feet, the Cotton Valley sands at 19,300 feet, and the Knowles formation at 20,000 feet.) The memo also stated that Shell's expected profit from the Hosston and Knowles production in the Alcorn Prospect would be 93.2 million dollars, and that "[t]his test will help evaluate Shell's acreage on other closures in the northern Mississippi Salt Basin." (Emphasis added). The Shell-Cohn Unit No. 1 well was subsequently drilled on the east side of the 640-acre unit to a depth of 21,500 feet, at a total cost of $7,599,973.00. The well was found to be non-productive at depths below 12,000 feet. However, Shell encountered at 10,509 feet a zone, designated the Washita-Fredericksburg formation, which appeared to be potentially productive.

 Thereafter, Shell petitioned the Board to force pool a 320-acre unit on the west half of the original 640-acre unit. Shell proposed to drill a well on this unit to test potential gas formations found at depths less than 12,000 feet below the surface. On November 19, 1980, the Board entered an order force pooling all interests in this 320-acre drilling unit, which was designated the Shell-Cohn Unit No. 2. (Wright's

 interest in this unit was 19.668 percent.) The Shell-Cohn Unit No. 2 well resulted in a dry hole.

 On December 15, 1980, Shell requested and received authorization from the Board to test the Shell-Cohn Unit No. 1 well at the shallower zone (approximately 10,500 feet) which had previously appeared to be potentially productive. After determining from the test that there was adequate production potential in the Washita-Fredericksburg formation, at an interval of 10,509 - 10,519 feet, Shell petitioned the Board on December 30, 1980, to "reform" the original 640-acre unit into a 320-acre unit in order to comply with spacing rules for wells producing from a depth of less than 12,000 feet subsurface.

 On January 21, 1981, the Board issued an order "reforming" the 640-acre Shell-Cohn Unit No. 1 to a 320-acre unit composed of the east portion of the original 640 acres. The 320-acre unit also was designated the Shell-Cohn Unit No. 1. The Board's order also authorized Shell to charge the force-pooled and integrated owners in the 320-acre unit their proportionate part of the cost incurred by Shell in drilling, completing, and supervising the operations of the unit. The recovered costs were to be collected by Shell from proceeds received from that portion of the well's production attributable to the interests of the non-consenting owners. Wright's interest in the 320-acre "reformed" unit was 19.088 percent, or 61.082 mineral acres.

 Thereafter, Shell drilled five more wells in the Alcorn field to develop production from the Washita-Fredericksburg formation. Four of the five wells were producers. The average cost of the six wells drilled to the Washita-Fredericksburg formation (including the Shell-Cohn No. 2 dry well) was $1,247,067.00. It was stipulated by Wright and Shell that this sum ($1,247,067.00) is a reasonable cost of a well drilled to the Washita-Fredericksburg formation.

 After learning that the Shell-Cohn No. 1 320-acre "reformed" unit well had been completed and was considered a producer, Wright requested from Shell information about well costs and the status of the well. On July 31, 1981, Shell wrote to Wright advising him that the cost of the well was $7,353,706.89 (this was later changed to $7,599,973.00), and that a sales contract for the gas produced from the Washita-Fredericksburg formation was being negotiated.

 On August 17, 1981, Wright advised Shell that it was his understanding that he was not responsible for the cost of drilling to the deep ...


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